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Premiership football rights auction: knowing the price of everything but the value of nothing

Telecoms.com periodically invites expert third-party contributors to submit analysis on a key topic affecting the telco industry. In this article Ed Barton, Analyst at Ovum, explores the implications of the latest Premiership football TV rights deal, especially as it affects Sky, BT and the UK multiplay market.

The prices achieved of the Premiership UK live TV rights packages are among the less interesting aspects of the entire process, but for those of you who have been living under a rugby ball shaped rock for last day or so here they are: £5.1b for the lot, Sky is on the hook for £4.2b over three years for 126 matches per season including the crown jewel slot of Sunday afternoon. BT has committed to £960m over the same period for 42 matches per season.

While the FAPL hinted at other “highly credible” bidders there was no further fragmentation of rights in the UK market. Of course as Setanta and ESPN have discovered, there is no point in just having a small slice of football rights, the commercial model doesn’t come close to working. You have to acquire a critical mass of football rights to get the punters in and have adjacent businesses whose success will also be driven by rights ownership. Make no mistake as to the eye watering scale of this sum relative to UK TV spending: it is more than the BBC’s entire annual budget. Assuming broadcasters spend around £20b annually on populating UK linear broadcast schedules Premiership football will account for around one quarter of that…for an audience share of around one half of one per cent.

So far so spectacular for club owners and players whose already capricious appetites for Kristal and supercars will continue to be sated, thank goodness. For the companies themselves the morning after the night before is likely to be slightly blurrier. Sky’s outlay for football will increase by 80 per cent per year – £330m is not the kind of sum even a business the size of Sky finds down the back of a sofa and management has not changed profit forecasts. Sky has said that it will find this sum from efficiency gains, some of which will result from the scale and efficiencies arising from the creation of Sky Europe. Whether it will also cut into other programming investments at a time when Sky has just had its most successful original drama launch in Fortitude remains to be seen. We also assume a human impact in realising the necessary efficiencies and expect, sadly, a reduction in headcount.

BT’s position hasn’t changed significantly: cost increase was around 30 per cent for roughly the same amount of matches. It also ensured Sky paid a King’s ransom to win this battle. Allied with exclusive Champions and Europa League football any serious UK football fan has to get access to BT Sport somehow. BT Sports role as a loss leader for ultra-fast broadband will continue to be key and while BT may tacitly cede pay TV market leadership to Sky, high speed broadband market leadership is preserved and is likely to be for the foreseeable future. This is crucial as the lion’s share of future growth in entertainment spending is based on IP distribution and BT remains in the box seat for providing this conduit to the household and the OTT content bundling opportunities – following the Netflix deal which, for the first time, integrated the Netflix subscription into BT’s billing – is likely to be the first of many. The football rights it has acquired are just enough to support its ambitions in TV, high speed fixed broadband and, following the acquisition of EE, mobile and mobile broadband scented quad-play. The major tension for BT was in the impact overspending might have had on the broadband pricing margin squeeze test – which now allocates BT Sports’ rights acquisition spending in the cost base for high speed broadband – imposed by OFCOM but at these levels that fear has receded somewhat.

So what does £4b buy one these days? This is where things get interesting. So much ink has been wasted on the top line price, the price per game topping £10m on average (commentators wailing about how you won’t get a return on that for Hull vs Burnley on a Tuesday night when that is only an average price and, actually, a Manchester United vs Manchester City title decider would more than compensate for dozens of Hull Burnleys, no disrespect intended to Tigers and Clarets fans…all five of you) and how the pricing is totally out of kilter for what other sports cost such as the £60m or so Sky pays F1 annually for live rights. As for the hippies suggesting football uses the money to reduce ticket prices at football grounds, Amazon.co.uk has plenty of cheap text books on basic economics some of which use very large fonts and very short words.

£4b buys Sky continued dominance in UK pay TV. Losing the bulk of the rights to BT would have enabled it to eat into Sky’s TV subscriber base at a rate of knots and build towards pay TV market leadership. We estimate that around half of Sky’s subscribers subscribe to the Sky Sports package which is predicated on having the most live Premiership football. Losing this would translate directly into losing up to half of Sky’s subscriber base in the year leading up the neutered sports package as well as other deeply unpalatable possibilities such as huge pressure for a reduction in subscription pricing now that the crown jewels had been lost. Also consider that to get the Sky Sports package you have to buy the basic channel package – without it Sky’s ability to fund the carriage of dozens of other channels is negatively impacted threatening the entire channel bouquet (this is not insignificant, while the household purchasing decision may be driven by Daddy and Daughters love of football, Brother and Mother may tolerate this because they get to watch Dave and the Travel Channel respectively, and don’t they just love the PVR and Sky Go).

As crucial to the value proposition are some of the unique qualities of televised sports: it is pretty much the only content left which isn’t time-shifted and is never likely to be so the value of the ad inventory will continue to rise. Pay TV sports viewers are made up of some of the richest demographics around (some may argue that, at the prices Sky charge and will shortly be charging, they have no choice but to be, and they have a point) with plenty of discretionary spending and they are also overwhelmingly male. Rich and easy to target, a cursory glance at the ad breaks on Sky’s Ford Super Sunday (a deal which has been in place since 1992) demonstrate the appetite of car manufacturers, brewers and bookies to bid up the value of these slots. And Ovum believes that the good times for advertising during live sports will continue for some time because we are in a process where TV ad inventory is splitting into ultra-high value (sport, no-one’s “got talent” type shows) inventory and an incredibly long tail of slots whose price is being continually eroded unless you add addressability (which Sky are also doing, but that is the subject of another upcoming report) or integrated buys across broadcast, online streaming, DAI in PVR, OD and online streaming.

So the price is high and perhaps not quite right but Sky had no choice but to win. While we might point to the efficiency savings and the impacts they will have on Sky going forward, that is nothing compared to the frenzied reaction if Sky had lost and the existential threat it would have faced in that scenario. The question of how much growth is left in UK pay TV to sustain this and potential future increases is a pertinent one: live football is already dependent on having adjacent businesses (notably broadband) as well as TV subscriptions and advertising to fund it at these levels and one wonders how much more runway there is to make another 70 per cent increase viable. These valuations also discount any business without huge, recurring, subscription revenues from considering bidding (the Apple or Google buying rights scenario) unless they are insane.

Even if growth does slow at the next auction, the global appeal of Premiership football guarantees significant price increases for foreign rights for generations to come as international markets monetise TV consumption more effectively. You’ll be glad to hear that Premiership footballers and their agents won’t be shopping at Aldi anytime soon. The river of money accruing to clubs will become a torrent with even the bottom placed club guaranteed around £100m, which offers up the tantalising possibility that, starting from 2016, someone might even consider it worthwhile buying Aston Villa.

Ed heads up the industry-leading TV Practice at Ovum where his primary responsibilities include setting the research agenda and ensuring the requirements of Ovum’s extensive client base are continually fulfilled. In addition to analyzing how traditional TV will evolve, he focuses on disruptive viewing paradigms enabled by IP distribution and the ever-growing availability of connectable devices. Ed also contributes to adjacent Ovum research programs on issues related to media and entertainment.

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